News & analysis

Trade wars may not be so easy to win after all – and that’s a good thing.

Jan 04, 2019

GBP

After taking a good old fashioned nose dive early morning during the Asian session yesterday, sterling not only pared its losses, but even managed to close above its opening level eventually. The Construction Purchasing Manager Index will be one of the last in line to claim credit for this as it came in virtually bang in line with expectations at a score of 52.8. A bounce back from the fall on Wednesday seems a more likely explanation, as there seemed to be no direct catalyst for this drop except for the Meaningful vote deadline drawing nearer with still no agreement in Parliament yet in sight. Today at 9:30 GMT arguably the UK’s most important data release for the week is scheduled with the Services PMI.

EUR

After having come under pressure in the first full trading day of the year the euro turned around its faith yesterday and made inroads against USD and GBP. Money supply data yesterday showed that the 3-month loan growth to non-financial firms in the Eurozone stands around the highest levels since the great financial crisis, which is a ray of light concerning the level of economic activity in the Eurozone. Today promises to be an interesting day for the Eurozone datawise, with Final Services PMIs at 9:00 BST and the Consumer Price Index Flash estimate for December at 10:00.

USD

We saw a gloomy greenback dangling at the bottom of the G10 currency board yesterday after the ISM Manufacturing Index produced its biggest one month drop in decade. The headline reading fell from 59.3 to 54.1, well below the 57.5 consensus, with the sub-indices bringing even more horrendous news. The leading New Orders sub-index crashed at terminal velocity and shed a worrying 11 points, with the Production, Supplier Deliveries and Employment sub-indices displaying drops as well. This shows that trade wars may be less easy to win after all, which paradoxically can be a good thing, as this will make US companies put more pressure on President Trump to dial back his trade clashes with China. Some positive signs are already appearing on this front with China’s commerce ministry reporting that US and Chinese officials will meet on Monday for the first formal talk since the three month trade truce was struck between the blocs. This afternoon holds the possibility of volatility for the US dollar with Non-Farm Employment growth, Average Hourly Earnings and the Unemployment rate at 13:30 GMT, followed by Federal Reserve Chair Jerome Powell speaking at 15:15.

CAD

Yesterday, the loonie gained around one percentage point against the dollar, finishing in the second position of the G10 board. A slight recovery in the oil prices might have provided some support to the currency, although admittedly the gloomy PMI reading for US manufacturing likely did some of the heavy lifting as well. Regardless, the new trade agreement that Canada activated together with Asian and Pacific counterparties came into force last weekend, which could start bringing a breath of fresh air to the Canadian economy. The Comprehensive Agreement for Trans-Pacific Partnership (CPTPP) aims to eliminate barriers in most traded goods and is meant to be the world’s biggest trade deal. Simultaneously, this leaves US with less influence in Canadian trade balance. Today, new employment data is coming out at 13:30 GMT, which could be loonie positive should it keeps in line with the sound November reading.